Question

Differentiate between ‘Capital Market’ and ‘Money Market’ on the basis of the following : (i) Participants, (ii) Instruments, (iii) Duration.

• A. Subjective/Descriptive Question
• B. Not Applicable
• C. Not Applicable
• D. Not Applicable

Hint:

To remember the distinction easily, remember that the Money Market is a wholesale market for short-term, low-risk liquid debt where major financial institutions interact, whereas the Capital Market is an investment ecosystem where retail and corporate funds are directed into long-term wealth assets like equity and debentures.

Answer 1

The Correct Option is A

Step 1: The basic difference.
The Money Market deals in funds that are borrowed and lent for a short period, usually up to a year, while the Capital Market deals in funds raised for the long term, for years or even permanently in the case of equity shares.
Step 2: Participants.
The Money Market is mostly used by large institutional players, the RBI, commercial banks, financial institutions and big corporates, since the amounts involved are large and the transactions need institutional backing. The Capital Market, by contrast, is open to a much wider group, individual investors, mutual funds, insurance companies, banks and corporates all participate here.
Step 3: Instruments.
Money Market instruments include treasury bills, commercial paper, certificates of deposit and call money, all of which are short term and highly liquid. Capital Market instruments include equity shares, preference shares, debentures and bonds, which represent longer term ownership or lending.
Step 4: Duration and conclusion.
Money Market instruments mature within a year, sometimes within days, whereas Capital Market instruments run for several years or, in the case of shares, have no fixed maturity at all. So the two markets exist side by side to serve different time horizons of financing, short term working capital needs through the Money Market and long term investment needs through the Capital Market.